Netflix’s true crime documentary titled Madoff: The Monster of Wall Street, gives an insight into the operations of a Ponzi scheme and how gullible “investors” were lured into “giving away” their money to a fraudster.
Bernie Madoff’s Ponzi scheme relied on funds from unknowing investors. Their money would subsidise the withdrawals made by his other clients that extracted their investment gains.
But, little did they know Madoff wasn’t investing a penny despite what their account statements indicated and was pocketing most of it himself.
When the market crashed in 2008, Madoff’s clients began withdrawing their money faster than he could pay them. It was only a matter of time before he got caught, and the stress led him to confess to his sons.
Much earlier, Allen Stanford organised a cricket match between his team – Stanford Superstars (made up of West Indian cricketers) and England, which offered a winner-take-all prize money of US$20 million (RM90.5 million).
Stanford was filmed cavorting with the WAGs (wives and girlfriends) of the players during a warm-up game between England and Middlesex. Matt Prior's pregnant wife was snapped sitting on Stanford's lap.
But some journalists smelt a rat. The Independent wrote: “Of all the short-form matches currently being organised, the conclusion is easily reached that Stanford Superstars v England is the most offensive. It has no context as a proper sporting competition, it is neither country versus country, club versus club or invitation XI versus invitation XI. It is a rococo hybrid.”
The superstars never saw a cent of their money and were told Stanford had invested them to get better returns.
Months later, Stanford was arrested, charged and convicted and is now serving a 110-year jail term for operating a Ponzi scheme that wiped out US$7 billion (RM31.6 billion) of investors’ funds.
A Ponzi scheme - named after Charles Ponzi who operated such a fraudulent system in the 1920s — is an investment where depositors are promised a very high rate of returns, with seemingly low or zero risks.
The money ploughed in by new depositors is then used to pay returns to the earlier investors. The entire exercise snowballs until it is no longer sustainable, the company is wound up and depositors lose their money.
In Malaysia, such Ponzi schemes are operating under various guises.
The Association of Trust Companies Malaysia, together with the Life Insurance Association of Malaysia, the Malaysian Financial Planning Council and the Financial Planning Association of Malaysia, among others, brought their concerns about certain cash trusts to the DAP National Public Complaints Bureau chairperson and Kepong MP Lim Lip Eng.
Their key complaint centred on extremely high returns promised by these trusts and other outfits with similar modus operandi, which they suspect could be a Ponzi scheme.
Some of these companies are said to offer returns of as high as 36 percent per annum.
Lim was quoted by The Edge as saying: “Few financial products related to money games are going around and being offered by certain trustee companies. It (the particular cash trusts and similar schemes in question) is a big scam. They took RM1 billion from the market last year.”
He added that there is no proper regulation by Bank Negara Malaysia (BNM) or the Securities Commission Malaysia (SC) about these trusts, suggesting there may be a loophole in the law and the governance of these trusts.
Cash trusts come under the purview of the Registrar of Companies (SSM) and terms and conditions include:
• the authorised capital of the company is not less than RM500,000;
• the board of directors are to be appointed with due care and attention according to the company’s Articles of Association;
• at least RM150,000 of the authorised capital has been bona fide paid up;
• the company has deposited securities approved by the finance minister to the value of RM100,000 with the accountant-general; and
• the company is able to meet its obligations, apart from its liabilities to its shareholders, without taking into account the securities deposited with the accountant-general.
So, the entry level is low compared to other financial institutions supervised by BNM.
In short, if you have a few hundred thousand, you can collect billions from the public. No checks on you, there is no supervisory body except that you submit your annual statement of accounts to the SSM.
Our checks showed that one company had collected as much as RM3 billion.
Prominent people are involved…
Last week, Lim brought the issue to Parliament and named a number of prominent people who are fronting such companies.
They include a former deputy minister and a former deputy inspector-general of police.
Lim said he had met officials of the Securities Commission, police, BNM and SSM - seeking their intervention to protect the investors before they fall victim to such fraudulent schemes.
Understandably, there are hundreds of thousands of companies under its purview. It has neither the resources nor manpower to undertake extensive investigations on such schemes.
In such circumstances, it would only be appropriate if such companies be brought under the purview of BNM and be subject to the Banking and Financial Institutions Act (Bafia).
The longer the authorities wait, it will be easier for those behind such schemes to gulung tikar (fold up) and stash their money in some safe haven in the Virgin Islands or Seychelles.
Maybe in the next round of secretive accounts exposed in the Panama Papers or the Pandora Papers, their names will appear prominently.
Let us not wait until then and then cry over spilt milk. The systems in our government have a duty of care to protect investors but often, the victims are blamed for their predicament because of greed. And this could probably be right. - Mkini
R NADESWARAN is a veteran journalist who writes on bread-and-butter issues. Comments: citizen.nades22@gmail.com
The views expressed here are those of the author/contributor and do not necessarily represent the views of MMKtT.
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